Closing Costs, Explained Line by Line
Closing costs are the fees and prepaid items due when your purchase closes. Freddie Mac puts them at 2% to 5% of the price — here is what that money buys.
How big are closing costs?
Freddie Mac says closing costs typically range between 2% and 5% of the purchase price; on a $200,000 purchase that means $4,000 to $10,000. They come on top of the down payment, so your “cash to close” is both together.
What’s included
The federal Loan Estimate groups costs into sections. Understanding them makes offers easier to compare.
Loan costs
- A. Origination charges — what the lender charges to make the loan, including any discount points (one point is 1% of the loan amount and buys a lower rate — see the points calculator).
- B. Services you cannot shop for — appraisal, credit report, flood certification and similar services the lender chooses.
- C. Services you can shop for — typically title insurance and settlement services, and sometimes a survey or pest inspection.
Other costs
- E. Taxes and government fees — recording fees and, in some states and counties, transfer taxes.
- F. Prepaids — interest from closing to the end of the month, and often the first year of homeowners insurance.
- G. Initial escrow payment — a cushion of property tax and insurance. Freddie Mac notes most lenders require two months’ worth of these reserves up front.
- H. Other — for example a home inspection, HOA transfer fees or an owner’s title policy.
Prepaids are not fees
Prepaid interest, insurance and escrow deposits are not charges for a service; they are your own future costs collected early. They are easy to calculate:
Prepaid interest = loan × rate ÷ 365 × days from closing to month end
Escrow deposit = (annual tax + annual insurance) ÷ 12 × months required
A worked estimate
For a $350,000 home with 10% down ($315,000 loan) at 6.5%, a 1% origination fee, example third-party fees of $3,650, 15 days of prepaid interest, two months of escrow at the U.S. average effective tax rate and a $1,800 insurance premium paid at closing:
| Lender charges | $3,150.00 |
|---|---|
| Third-party fees (examples) | $3,650.00 |
| Prepaid interest | $841.44 |
| Escrow deposit | $819.17 |
| First-year insurance | $1,800.00 |
| Total | $10,260.61 (2.9% of the price) |
The third-party amounts here are placeholders, not averages; your Loan Estimate will list real ones. Build your own estimate with the closing cost calculator.
How to reduce closing costs
- Compare at least three Loan Estimates. Sections A and B vary most between lenders, and the standard form makes side-by-side comparison straightforward.
- Shop the shoppable services in section C, especially title and settlement.
- Negotiate seller concessions — a credit toward your costs in the purchase contract.
- Be wary of “no closing cost” offers: the costs are usually covered by a higher interest rate (lender credits) or added to the loan, which you pay for over time.
The Closing Disclosure
Lenders must give you a Closing Disclosure at least three business days before closing. Compare it with your latest Loan Estimate; the CFPB’s explainer covers which fees are allowed to change and by how much.
Sources
- Freddie Mac, “Understanding homebuying costs,” My Home by Freddie Mac (accessed September 2026)
- Consumer Financial Protection Bureau, “Loan Estimate explainer”
- Consumer Financial Protection Bureau, “Closing Disclosure explainer”
- Consumer Financial Protection Bureau, “What are (discount) points and lender credits and how do they work?”